(This post has been updated now that I’ve heard from Levitt on the source of the numbers discussed below.)

In this past Sunday’s New York Times, Steve Levitt and Stephen Dubner make the claim[1] that people systematically miss an opportunity to profit on the betting market. If you always take the underdog at home in the NFL, you’ll make money:

As it happens, there is one betting strategy that will routinely beat a
bookie, and you don’t even have to be smart to use it. One of the most
undervalued N.F.L. bets is the home underdog — a team favored to lose
but playing in its home stadium. If you had bet $5,000 on the home
underdog in every N.F.L. game over the past two decades, you would be
up about $150,000 by now (a winning rate of roughly 53 percent).

That figure of $150,000 seems like a pretty good deal. Of course it requires betting $5,000 per game to get up to $150,000. But is it true? Is it true that a naive strategy of playing the home underdog wins 53% of the time and cumulates to winnings of $150,000 over two decades? Where did those number come from?

There he reports that between 1980 and 2001, home underdogs beat the spread 53.3% of the time. There were 1483 games during that time when the home team was the underdog. Playing the home underdog in those games leads to a profit over the 21 years of $143,110 or roughly $150,000 as the article in the Times suggested.

Can you count on those returns holding up?

Stephen and Philip Gray looked at NFL point spreads from 1976-1994 in their paper, "Testing Market Efficiency: Evidence from the NFL Sports Betting Market" in the Journal of Finance. They found that a naive strategy of betting on the home underdog wins 52.51% of the time.

If the next 20 years are like the 1976-1994 period you will only make $20,000 betting $5,000 on every home underdog.

Do not try this at home. Do not bet the home underdog for the next 20 years. Not only do readers of the New York Times now know about this strategy, but it ignores the opportunity cost of putting thousands of dollars every week on betting football games instead of investing it elsewhere.

The bottom line is that betting the home
underdog from here on out is not a "betting strategy that will
routinely beat a bookie." Don’t bet on it.

Levitt and Dubner close their article with a worse suggestion:

A look at the past reveals this interesting anomaly: whereas only
one-tenth of regular-season N.F.L. games have a final point spread in
the double digits, fully one-third of the past Super Bowls (13 out of
39) had double-digit point spreads. This is especially surprising since
the Super Bowl matches the best team from each conference, whereas
regular games often pit a good team against a poor one.

What does
this yawning gap mean? It suggests that faced with the risk of wiping
out a season’s profits, bookmakers play it safe on Super Bowl Sunday.
Unlike a typical N.F.L. game, the Super Bowl gives a bookie incentive
to balance his books and simply pocket the vig. To do so, he needs to
inflate the spread against the favorite even more than usual, bringing
in more underdog money and making the odds of the favorite’s covering
the bet even lower than usual.

A strategy of consistently betting
the underdog has not done so well in past Super Bowls, paying off only
17 times in 39 years (the favorite covered the spread 19 times, and
there were three pushes). But a small sample set should not get in the
way of a larger truth: the economics of bookmaking suggest that betting
the underdog today remains the single best bet of the year.

The claim (which is explored earlier in the article) is that bookies exploit biased bettors during the regular season. Bettors systematically overvalue the favorite and undervalue the underdog. Bookies know this and during the regular season tilt the point spread toward the underdog, essentially betting along with the underdog and punishing all that money that naively took the favorite. Bookies take this risk because they realize that bettors are biased and underestimate the value of the underdog.

Could be. I’m skeptical of the claim that bookies during the regular season systematically take on risk. (Levitt makes this claim in his EJ paper[2].) Maybe it’s true but I’m skeptical. But somehow, bookies get risk averse on Super Bowl Sunday and try to even out the money. To do that, they’ve got to give the underdog more points to get enough biased bettors to take the underdog.

The implication is that the underdog bet on Super Bowl Sunday is an even better bet than the rest of the year.

But the Super Bowl is a neutral site. Even the optimistic 53% number comes from home underdogs. Neutral underdogs don’t overperform. So betting on the underdog shouldn’t be a profitable strategy.

At Super Bowl XL, the underdog again failed to cover the spread. The "single best bet of the year" has still only won 17 times and failed 20 times. I don’t think the small sample has anything to do with it.

The lesson: beware the free lunch, even when it’s given away by an economist.